Pakistan’s economy is in dire straits with very high inflation, dangerously low foreign exchange reserves, and global lenders like the International Monetary Fund (IMF) refusing to disperse further funds. While the economy has been doing badly for quite some time, the floods of 2022 caused unprecedented damage to the country with critical infrastructure destroyed and millions displaced.
Currently, Pakistan sits on the verge of economic collapse with its hopes pinned on getting concessions from the IMF on the Extended Fund Facility (EFF) established in 2019, as well as getting help from friendly nations in the form of long-term loans or donations.
On Monday (January 9) the International Conference on Climate Resilient Pakistan (ICCRP) began in Geneva where Pakistan’s Prime Minister, Shehbaz Sharif, made a desperate plea for help. On the sidelines, Pakistani representatives met IMF officials regarding its currently stalled EFF.
Pakistan’s devastating 2022 floods
While Pakistan’s economy was not in great shape even before 2022, the floods took it to the brink of disaster. In 2019, Pakistan had come to an agreement with the IMF about an EFF worth $6 billion, which was later increased to $7 billion.
The IMF’s press statement at the time said: “Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness, and a weak external position. This reflects the legacy of uneven and procyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses.”
To this already precarious situation, the floods brought unimaginable economic damage. Deemed to be a consequence of climate change, the floods inflicted an estimated loss of $3 billion on the country, caused over 1,700 deaths, and displaced 8 million people, reported Dawn.
The floods derailed any semblance of economic recovery, and Pakistan failed to keep the promises it had made to the IMF when the EFF was sanctioned. Thus, in November 2022, the IMF refused to release a pending payment of $1.18 billion due to the government’s unwillingness to meet certain demands including assurances from Pakistan on increasing energy rates, imposing more taxes, and artificial control over the exchange rate.
The forex crunch
Currently, the country is in the midst of a severe cash crunch, with foreign exchange reserves in the State Bank of Pakistan’s (SBP) depleting to $5.576 billion during the week ended on Dec 30, 2022, reported Dawn.
Along with another $5.8 billion held by commercial banks, the forex reserves are just about adequate to pay for three weeks of imports to the country. As Pakistan still reels from the effect of the 2022 floods, servicing foreign debt and paying for crucial commodities such as medicine, food, and energy are among its chief concerns.
According to data released by Pakistan’s central bank, the reserves are less than half of what they were a year ago and at an 8-year low. However, Pakistan is scheduled to pay $8.3 billion to external lenders over the first three months of 2023.
Without any relief, the country is set to default on these payments.
Turning to friendly countries
Pakistan has turned to friendly countries and other international aid for help. On January 4, Finance Minister Ishaq Dar expressed hope for a $3 billion bailout from Saudi Arabia, media reports said. This proposal for a second bailout from the Arab kingdom in less than a year awaits final approval, the reports have said.
Help could potentially come also from China, Pakistan’s “all-weather friend”. PM Sharif had a lengthy call with Chinese Premier Li Keqiang, reported the Chinese Embassy on January 5.
The ICCRP meeting
Pakistan’s Information Minister Marriyum Aurangzeb said on Monday (January 9) that donors had committed to give more than $8 billion to help Pakistan recover from last year’s floods, reported Dawn. The pledges came as the ICCRP hosted by PM Sharif and UN Secretary General Antonio Guterres kicked off in Geneva.
Pakistan so far has received funding pledges from countries like the US, France, Saudi Arabia, China, and Japan, with the Asian Development Bank and Asian Infrastructure Investment Bank also promising help.
However, as Sharif put it, “We (Pakistan) are racing against time,” with misery piling up on the people as the wheels of global financing turn slowly. Guterres said that the people of Pakistan were “doubly victimised” by climate disasters and “morally bankrupt” global financial systems. “This system routinely denies middle-income countries of debt relief and concessional relief needed to invest in resilience against natural disasters,” he said.
Inflation and austerity
As its leaders try to rally global support and assuage concerns regarding Pakistan’s capacity and commitment to its international obligations, ordinary citizens have been suffering. With massive spikes in prices of food products and other essentials, Pakistan recorded an inflation rate of around 24.5 per cent in December. This number was even higher in rural Pakistan, close to 29 per cent, according to data from Pakistan Bureau of Statistics (PBS).
Prices of perishable food items have soared by nearly 56 per cent. Onion prices have risen by more than 415 per cent since last year. Wheat, a staple in the Pakistani diet, has seen prices increase by 57 per cent, according to PBS. It is reported that a single roti currently costs Rs 30 — for context, the minimum daily wage is pegged at Rs 500, with an average family consuming around 10 rotis a day.
Austerity measures of various kinds are in effect. On December 21, 2022, Defence Minister Khawaja Asif told reporters that the nation could no longer sustain its energy consumption. In a slew of energy-conserving measures, shopping centres were ordered to close at 8 pm local time, and marriage halls and restaurants by 10 pm. 20 per cent of government employees have been asked to work from home, Asif said, according to Bloomberg.
